Scoop has an Ethical Paywall
License needed for work use Register

Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


A Better Dairy Deal - McKinseys REPORT 1999


McKinseys REPORT 1999

The industry’s strategy for growth and diversification was developed in 1998 by a highly regarded international consulting firm, McKinseys.

The industry’s leaders adopted the McKinsey report. This lead to the Mega Co-op proposal in 1999.

1999 Mega Co-op compared to 2001 Global Co

Global Co is not the same as the Mega Co-op plan. Compared to Mega Co-op, Global Co does not have the following:

- A normal company structure for new growth activities - eg new specialised ingredients, consumer products and biotechnology - with farmer and outside shareholders;

- $4 billion of new share capital to fund the growth businesses;

- A large proportion of independent directors;

- A requirement to achieve 4% real efficiency gains every year;

- Separate classes of shares - ie “Q’ share for quota returns, and “A’ shares for returns on commodities and basic ingredients;

- Trading of shares among farmers;

- An independently set raw milk price; or

- To comply with the Commerce Act in forming the merger.

For these and other reasons, Global Co is a significantly weaker than Mega Co-op.

Executive summary of McKinseys’ advice

- Two competing NZ firms would be $300 million per year better than one Mega Co-op.

- One Mega Co-op would only work if:

- The value-added and consumer businesses were set up as a corporate with farmers and other investors as shareholders;

- It complied with eight pre-conditions (to deal with the real risk of monopoly inefficiencies);

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

- It introduced dynamic, fresh management starting with a “clean slate’ and a “new performance ethic”. (McKinseys called this “a catalytic event’ and is supposed to create about $100m of gains); and

- The transition was implemented in a “fast and disciplined manner”.

- Even then, the gains from Mega Co-op were estimated to be in total only $180 million per year, out of an annual turnover of about $9,000 million.

- The other $130m now claimed by Global Co came from already planned changes within the Dairy Board.

- If the Mega Co-op did not satisfy the four conditions above, it would be about $800 million per year worse than two competing firms.

- Global Co does not satisfy the four conditions outlined above.

- The main gains ($100 million per year) from a merging are supposed to come from a new culture from fresh management. But Mr Roadley has stated that Global Co’s chief executive will be an industry insider from NZ, not a new broom to sweep away old cobwebs.

Industry’s strategy

In 1999, industry leaders agreed on a “New Era of Value Creation” . The strategy was (and still is) to:

- Buy major milk factories in SE Asia and Latin America;

- Use existing networks to buy and sell dairy products from other countries;

- Develop new specialised ingredients, especially in proteins;

- Develop new consumer and biotechnology products; and

- Cut costs by consolidating and adopting a fresh, commercial culture.

Current sales are about $10 billion per year. Most of it comes from selling commodities and basic ingredients. NZ is successful because we can make milk cheaper than our competitors.

Under the industry’s strategy, sales are supposed to rise to $30 billion over about 10 years.

The additional $20 billion per year is supposed to come from new specialised, consumer and biotechnology products.

These areas are a whole new ball-game. Our competitive advantage won’t come from producing cheap milk. We will only succeed if we can give fussy consumers exactly what they want.

Key requirements

To achieve this new business growth, McKinseys was very clear that it would need:

- $12 billion of new share capital, much of which would have to come from outside the industry;

- A corporate structure (not a co-operative) for the consumer and value-added businesses;

- Ownership could not be linked to supply (as it is now and under Global Co);

- Different payouts for different farmer groups -

(ie no cross-subsidising across farmers - cost structures must reflect true economics, to avoid “cherry picking’ by competitors); and

- A separate, independently-set commercial price for farmers’ raw milk.

Need for new capital

About $12 billion of new capital is to come from:

- $8 billion in additional borrowings;

- $4 billion in new share capital.

Obviously, 14,500 NZ dairy farmers can’t provide $4 billion. So a lot of it is to come from investors outside the industry.

There is simply no way the new value-added and consumer businesses can be funded exclusively by NZ dairy farmers. We don’t have the capital.

Options considered

McKinseys looked at many structures for implementing the strategy. In the end, they short listed three:

- Option 1: Two competing firms - both vertically integrated, both competing in the same business activities;

- Option 2: Two firms + “sister’ firm - one focusing on commodities and specialised ingredients; another focusing on commodities and basic ingredients; and the “sister’ firm would focus on consumer products;

- Option 3: One firm + a “sister’ firm - this is the 1999 Mega Co-op structure. Mega Co-op would have commodities and ingredients, with the “sister’ firm focusing on consumer products.

McKinseys’ conclusions

- Option 2, two firms + a “sister’ firm came out on top - it was better than Mega Co-op (option 3) by $300 million per year.

- Merging Kiwi and NZ Dairy Group factories under one co-op would give benefits of only $15-25 million per year compared to keeping them separate.

Don’t forget that turnover is $10,000 million. A $15-25 million gain from owning the NZ factories under one co-op is simply miniscule.

McKinsey found that a Mega Co-op would be better than two competing firms only if monopoly inefficiencies could be eliminated. If that isn’t possible, McKinsey did not recommend a single Mega Co-op.

McKinseys “must dos’

If the industry wanted to go with Mega Co-op, McKinseys were very clear - three “obligations’ would have to meet:

McKinseys stated:

“These three requirements are “must dos’

that the NZ dairy industry must deliver against”.

First McKinsey requirement - “strict adherence to the certain pre-conditions”

Global Co does not seem to comply with the following pre-conditions:

McKinsey Pre-Condition Included in Global Co?

Directors don’t get involved in management No

No history of directors following the

“nose in, hands out’ rule

A large proportion of independent directors 3/13

3 independent directors out of 13

is not a large proportion

An independently set raw milk price No

Mandatory 4% productivity gains every year No

Market-based pricing between business units No

Monitoring rates of return on total investment, including land value


Corporate structures and readiness to bring in outside share capital in consumer, ingredients and in-market ingredients


Second McKinsey requirement - “create and harness a catalytic event”

McKinsey Pre-Condition

Included in Global Co?

Clean sheet approach to the new organisation

Doubtful -

too much politics and “baggage’

Best top management team

Doubtful -

eg current dispute over CEO

Truly merit based people selection

Doubtful -

eg current dispute over CEO

New management dynamic

Depends on CEO and directors

New performance ethic

Depends on CEO and directors

Third McKinsey requirement - “ensure a fast paced, disciplined transition”

Clearly, the transition to Mega Co-op in 1999 was not “fast paced and disciplined”. It broke down.

The Global Co transition is not proving to be “fast paced and disciplined” either. The original public timetable was to have the farmer vote in March 2001.

It is simply not possible for 14,500 dairy farmers in a highly political co-operative to transition in a “fast paced and disciplined” manner.

$310 million gains from Mega Co-op or Global Co?

Global Co leaders claim it will deliver gains of $310 million per year. Where does it come from? McKinseys estimate $310 for Mega Co-op as follows:

Savings from Mega Co-op (but only if three McKinsey requirements met)

- Better co-ordination of NZ milk factories

$50 million

- Simplifying management

$30 million

- New management -”Catalytic event’

(ie fresh approach to management and culture)

$100 million

- Total gains -

but only if three McKinsey requirements met

$180 million per year

Savings from improvements even if no merger

- Dairy Board efficiency programmes $130 million


Two key things stand out from the McKinseys report:

- The Global Co structure never even made the McKinseys’ short-list .

Under Mega Co-op, the consumer business is separate corporate.

- The main gains from a merger are supposed to come from a new culture from fresh management. But Mr Roadley has stated that Global Co’s chief executive will be an industry insider from NZ, not a new broom to sweep aware old cobwebs.


© Scoop Media

Advertisement - scroll to continue reading
Business Headlines | Sci-Tech Headlines

FMA: MAS To Pay $2.1M Penalty For Making False Representations

Following proceedings brought by the FMA, MAS has been ordered to pay a $2.1M penalty for making false and/or misleading representations to some customers. MAS admitted failing to correctly apply multi-policy discounts and no claims bonus discounts to some customers, failing to correctly apply inflation adjustments on some customer policies, and miscalculating benefit payments.More

IAG: Call On New Government To Prioritise Flood Resilience

The economic toll of our summer of storms continues to mount, with insurance payouts now topping $1B, second only to the Christchurch earthquakes. AMI, State, & NZI have released the latest Wild Weather Tracker, which reveals 51,000 claims for the North Island floods & Cyclone Gabrielle, of which 99% (motor), 97% (contents), and 93% (home) of claims have now been settled. More


Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.